PITNEY BOWES INC annual report, FY2015

Pitney Bowes Inc. 2015 Form 10-K Summary

Business context and reporting period

Pitney Bowes is a global technology and commerce company providing mailing, shipping, presort, software, customer information management, location intelligence, customer engagement and cross-border ecommerce solutions. The filing covers the fiscal year ended December 31, 2015. The fourth quarter was included in the annual results; quarterly revenue was $936.9 million and income from continuing operations was $85.0 million.

The company reported three solution groups: Small and Medium Business Solutions, Enterprise Business Solutions and Digital Commerce Solutions. In 2015, it acquired Borderfree, sold Imagitas and completed the rollout of its inside-sales strategy in major markets.

Financial performance and key metrics

Metric	2015	2014	Change
Total revenue	$3.578 billion	$3.822 billion	Down 6%
Income from continuing operations	$421.0 million	$318.4 million	Up 32%
Net income attributable to Pitney Bowes	$407.9 million	$333.8 million	Up 22%
Diluted EPS from continuing operations	$2.00	$1.47	Up 36%
Diluted EPS including discontinued operations	$2.03	$1.64	Up 24%
Cash flow from operations	$514.6 million	$655.5 million	Down $140.9 million
Total cost of revenue	$1.559 billion	$1.681 billion	43.6% of revenue versus 44.0%
Total debt	$2.969 billion	$3.252 billion	Down $283.0 million
Cash and cash equivalents	$650.6 million	$1.054 billion	Down $403.6 million

Reported revenue declines reflected a 3% foreign-exchange translation impact, the Imagitas divestiture and exits from certain non-core markets. Business services revenue increased 3% to $801.8 million, while equipment sales, supplies, software, rentals, financing and support services declined.

Gross margin improved modestly as cost of revenue declined faster than revenue. Management attributed the earnings improvement primarily to higher gross margins, lower selling, general and administrative expense and productivity and restructuring benefits. The effective tax rate increased to 31.1% from 26.2%, partly offsetting operating improvements.

Segment revenue and EBIT trends were mixed. SMB Solutions revenue declined 9% and EBIT declined 5%. Enterprise Business Solutions revenue declined 3%, but EBIT increased 5%, led by Presort Services. Digital Commerce Solutions revenue increased 5%; Global Ecommerce revenue increased 29% and EBIT increased 16%, primarily due to Borderfree and higher package volumes.

Cash flow, liquidity and capitalization

Operating cash flow was $514.6 million, compared with $655.5 million in 2014. The decline was attributed to payment timing, higher employee-related payments, inventory purchases and lower collections.
Investing activities used $303.1 million, including $393.7 million for acquisitions and $166.3 million of capital expenditures. Proceeds included $289.2 million from business sales and $52.1 million from asset sales.
Financing activities used $570.7 million, including $516.1 million of principal repayments, $168.5 million of dividends to common stockholders and noncontrolling interests, and $131.7 million of share repurchases.
The company had $90 million of commercial paper outstanding and access to a $1.0 billion committed credit facility expiring in January 2020; the facility was undrawn at year-end.
Approximately 92% of debt was fixed-rate obligations, with a weighted-average rate of 5.2%. Management disclosed approximately $2 billion of debt maturities within five years.
Contractual obligations totaled $5.139 billion, including $2.862 billion of debt maturities, $1.261 billion of debt interest, $300 million of subsidiary preferred stock and $202 million of operating leases.
The company paid $0.75 per common share in dividends and repurchased 6.7 million shares during 2015. In February 2016, the board authorized an additional $150 million of repurchases.

Material changes versus the prior comparable period

Revenue decreased 6%, primarily because of foreign currency, the Imagitas sale, market exits and continued weakness in traditional mailing.
Income from continuing operations increased from $318.4 million to $421.0 million, despite lower revenue, due to cost reductions, restructuring benefits and improved margins.
Cash flow from operations fell by $140.9 million, while acquisition spending increased materially because of the Borderfree transaction.
Total debt declined by approximately $283 million after debt repayments, although current maturities increased to $461.1 million.
Borderfree contributed $63 million of 2015 revenue and added $300 million of goodwill and $137.5 million of acquired intangible assets.
Imagitas was sold for net proceeds of $292 million, generating a pretax gain of approximately $111 million.
Restructuring charges and asset impairments declined to $25.8 million from $84.6 million. The 2015 amount included $21 million of restructuring charges and a $5 million loss on the sale of the former headquarters building.
Other income included the Imagitas gain, while 2014 other expense included $62 million of debt redemption costs.

Guidance, outlook, risks and unusual items

Management did not provide specific numerical revenue or earnings guidance in the filing. For 2016, management expected restructuring benefits, acquisition synergies, go-to-market improvements and ERP efficiencies to largely offset incremental ERP implementation and advertising costs.

Management expected further stabilization in SMB Solutions, continued growth in Presort Services, ongoing challenges for Production Mail, increased demand for Software Solutions and growth in Global Ecommerce.
The U.S. ERP implementation was scheduled to begin in 2016 following the Canadian rollout in the fourth quarter of 2015. Delays, errors or operational disruption remain material risks.
Declining physical mail volumes, pricing pressure, technological substitution and postal-regulatory changes could continue to reduce mailing revenue and profitability.
A strong U.S. dollar adversely affected reported revenue, international competitiveness and cross-border ecommerce demand.
Global Ecommerce depends on a relatively small number of significant clients and is exposed to customs, trade, foreign-currency and regulatory risks.
Cybersecurity incidents, privacy requirements, information-system failures, third-party suppliers and outsourced service providers could disrupt operations and create legal or regulatory liabilities.
The company settled a Department of Justice investigation relating to Presort Services for $7 million, net of recoveries, without admitting liability.
A $300 million subsidiary preferred stock issue becomes redeemable at the subsidiary’s option beginning October 30, 2016. If not redeemed, its dividend rate increases by 50% every six months.
Management reported no material off-balance-sheet arrangements and concluded that internal control over financial reporting was effective. Borderfree, representing approximately 8% of assets and less than 2% of revenue, was excluded from the 2015 internal-control assessment.

Important facts for investors to verify

Whether revenue stabilization in mailing businesses offsets continued declines in installed meters and traditional mail volumes.
Execution, cost and disruption risks associated with the 2016 U.S. ERP implementation.
Borderfree integration, acquisition synergies, customer concentration and the contribution of Global Ecommerce.
Liquidity available after the $371 million January 2016 note maturity, the new $300 million term loan and other near-term debt maturities.
The company’s ability to sustain dividends and planned 2016 repurchases while funding acquisitions, capital expenditures, pensions and preferred-stock obligations.
Foreign-currency sensitivity, particularly to the U.S. dollar, British pound and euro.
Credit quality and delinquency trends in the $1.698 billion net finance-receivables portfolio.
Potential changes in tax reserves, unrecognized tax benefits, pension obligations and other postretirement liabilities.